The Fall of Overstock.com

Shares of Overstock.com (Nasdaq: OSTK  ) took it on the chin -- Brett Favre style -- on Friday, shedding nearly 16% of their value after the online discounter posted disappointing quarterly results.

Sidestepping an actual press release, Overstock.com chose to deliver a wider-than-expected loss in the form of a Securities and Exchange Commission filing.

Overstock.com's deficit widened to $0.15 a share in the third quarter, larger than both the $0.06 a share loss it posted a year ago and the $0.03 a share that analysts were targeting. Revenue, on the other hand, did rise a robust 27% to $245.4 million. Unfortunately, it also came at the expense of deteriorating gross margins.

Should investors be worried? Overstock.com has historically posted a loss during this seasonally sleepy quarter, but this is its largest third-quarter deficit since 2007.

Is the Overstock.com model broken?

Merchants know they can rely on Overstock.com to clear out their overruns and clearance items. In fact, just a fifth of the e-tailer's sales are stocked and fulfilled in its own warehouses.

This isn't necessarily a problem. Amazon.com (Nasdaq: AMZN  ) runs a thriving platform for third-party vendors. eBay (Nasdaq: EBAY  ) doesn't stock anything at all. The problem is that those same merchants can now turn to more dynamic outlets to unload their excess inventory in a hurry -- and I'm not talking about Big Lots (Nasdaq: BIG  ) .

Consumers are gravitating to flash-sale websites. Gilt, Rue La La, and HauteLook are just some of the sites that offer high-end designer fashions and other luxury items at steep discounts for a limited amount of time. Shopping for quality items at bargain prices has become an interactive endeavor. Even high-end jewelry e-tailer Blue Nile (Nasdaq: NILE  ) resorted to daily deals to drum up holiday sales two years ago.

Overstock tries to be many things. It's an overstock site, of course. It also hosts auctions, generates leads for auto and real estate sales, and features ads against many of its pages. In theory, it may all be incremental. In concert, though, it's a mess of a message. Why does someone wind up at Overstock.com? Is it a jack-of-all-trades? Why are ads wooing visitors elsewhere, despite the click revenue on the way out?

Three years ago, I compared the Overstock.com CEO to Randy Moss. The talented wide receiver had a renaissance on his arrival at New England in 2007. Byrne was cooking up a similar revival at Overstock.com.

Unfortunately, both charismatic dudes are hurting these days. Moss managed a single short reception yesterday against his former team, in the same game that Favre gashed open his chin. Overstock serves up another stinker on the field, with its largest third-quarter loss in three years.

The game may not have passed any of the players by, but it's time to get back to business -- and winning.

Has the game passed Overstock.com by? Share your thoughts in the comment box below.

Blue Nile is a Motley Fool Rule Breakers recommendation. Amazon.com and eBay are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a bull call spread position on eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz has been shopping online since the early 1990s, even before Overstock.com was around. He does not own shares in any of the stocks in this article. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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